28 6 chapter 28 investment policy and the framework

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Chapter 28 - Investment Policy and the Framework of the CFA Institute 2. Liquidity. Generally, endowment funds have long time horizons, and little liquidity is needed in excess of annual distribution requirements. However, the JU endowment requires liquidity for the upcoming library payment in addition to the current year’s contribution to the operating budget. Liquidity needs for the next year are: Library Payment +$200 million Operating Budget Contribution +$126 million Annual Portfolio Income −$29 million Total +$297 million Annual portfolio income = (0.04 × $40 million) + (0.05 × $60 million) + (0.01 × $300 million) + (0.001 × $400 million) + (0.03 × $700 million) = $29 million 3. Taxes. U.S. endowment funds are tax-exempt. 4. Legal/Regulatory. U.S. endowment funds are subject to predominantly state (but some federal) regulatory and legal constraints, and standards of prudence generally apply. Restrictions imposed by Bremner may pose a legal constraint on the fund (no more than 25 percent of the initial Bertocchi Oil and Gas shares may be sold in any one-year period). 5. Unique Circumstances. Only 25 percent of donated Bertocchi Oil and Gas shares may be sold in any one- year period (constraint imposed by donor). A secondary consideration is the need to budget the one-time $200 million library payment in eight months. b. U.S. Money Market Fund: 15% (Range: 14% - 17%) Liquidity needs for the next year are: Library payment +$200 million Operating budget contribution +$126 million Annual portfolio income −$29 million Total +$297 million Total liquidity of at least $297 million is required (14.85 percent of current endowment assets). Additional allocations (more than 2 percent above the suggested 15 percent) would be overly conservative. This cushion should be sufficient for any transaction needs (i.e., mismatch of cash inflows/outflows). Intermediate Global Bond Fund: 20% (Range: 15% - 25%) To achieve a 10 percent portfolio return, the fund needs to take above average risk (e.g., 20 percent in Global Bond Fund and 30 percent in Global Equity Fund). An allocation below 15 percent would involve taking unnecessary risk that would put the safety and preservation of the endowment fund in jeopardy. An allocation in the 21 percent to 25 percent range could still be tolerated because the slight reduction in portfolio expected return would be partially compensated by the reduction in portfolio risk. An allocation above 25 percent would not satisfy the endowment fund return requirements. 28-7
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Chapter 28 - Investment Policy and the Framework of the CFA Institute Global Equity Fund: 30% (Range: 25% - 35%) To achieve a 10 percent portfolio return, the fund needs to take above average risk (e.g., 30 percent in Global Equity Fund and 20 percent in Global Bond Fund). An allocation above 35 percent would involve taking unnecessary risk that would put the safety and preservation of the endowment fund in jeopardy. An allocation in the 25 percent to 29 percent range could still be tolerated, as the slight reduction in portfolio expected return would be partially compensated by the reduction in portfolio risk. An
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